Sive Morten
Special Consultant to the FPA
- Messages
- 18,564
Fundamentals
(Reuters) - The dollar gained on Friday after a brief dip as investors reckoned a weaker-than-expected U.S. December non-farm payrolls report would not deter the Federal Reserve from raising interest rates multiple times this year.
U.S. nonfarm payrolls increased by 148,000 jobs last month. Economists were forecasting job gains of 190,000. Employment data for October and November data were revised to show 9,000 fewer jobs created than previously reported.
The dollar briefly slipped after the softer-than-forecast number, but has since regained momentum.
Fed funds futures have priced in a more than 60 percent chance the U.S. central bank will hike interest rates in March, according to CME’s Fedwatch.
“We do not see anything in the current report that will dissuade the consensus view that a hike is forthcoming in March,” said Marvin Loh, senior global market strategist, at BNY Mellon in Boston.
He added that while the report was disappointing given the significant headline miss, it was mostly consistent with the late stages of the U.S. economy’s current expansion.
“We have had eight years of steady employment gains, representing one of the longest expansionary periods that has pushed unemployment to near its lowest levels in 50 years,” Loh said.
Another bright spot in the U.S. December employment report was the rise in wage growth, analysts said.
Average hourly earnings rose 9 cents, or 0.3 percent, in December after gaining 0.1 percent in the prior month. That lifted the annual increase in wages to 2.5 percent from 2.4 percent in November.
In late trading, the dollar gained 0.3 percent against the yen to 113.14, while the euro fell 0.2 percent versus the dollar to $1.2042.
That put the dollar index, a measure of the greenback’s value against six major currencies, up 0.1 percent on the day.
Some analysts still expect dollar weakness to be the prevailing theme this year because other central banks such as the European Central Bank and Bank of Canada are on a tightening path as well, enhancing the allure of their currencies.
“The Fed is no longer the only game in town,” said Jane Foley, senior FX strategist at Rabobank in London. “There has been a shift in market focus away from the tightening cycle of the Fed to that of other central banks in the G10.”
Meanwhile, other data on Friday showed the U.S. services sector also cooled slightly in December. That non-manufacturing index data had little currency impact, however.
Chart of the Week: US Economic Sentiment Improves on the Back of Tax Progress
by Fathom Consulting
Our US Economic Sentiment Indicator (ESI) climbed from 6.0% to 6.2% in November, a nine-month high. Although gasoline prices rose during the month, consumer confidence remained strong as the labour market continued to improve. Meanwhile, business sentiment was buoyed by progress on tax reform. Since those surveys were conducted, tax reform has been signed into law. Since the reform includes large cuts to corporate and personal income tax, business and consumer confidence are likely to remain elevated in the coming months. Accordingly, we expect our ESI for December (scheduled for publication next week) to remain high.
Looking ahead, we expect real GDP growth to exceed 3% this year, which is not as fast as the rate of economic expansion currently implied by our ESI, but a lot higher than potential and higher than the recent past. The US will become a more attractive investment destination with its corporate tax rate now in line with that of most other OECD nations, although it remains to be seen just how much real economic activity moves to the US — some firms may exploit tax loopholes and simply book their profits there, without shifting the location of their production.
Wages and inflation will be boosted by the tax cuts, especially with the economy close to full employment, as the Phillips curve is not dead. However, the plan falls well short of the sort of stimulus that we think is required to generate a return to more normal rates of interest, and in so doing propel the US to a significantly higher growth path. Moreover, by overwhelmingly favouring the wealthiest, who have a lower-than-average marginal propensity to consume, the plan achieves less bang for its buck than it might have, and will increase income inequality, which is already being driven higher by technological change.
COT Report
If we will take a look at a bit longer picture - EUR shows impressive positive dynamic. Net position has turned positive for the first time since 2014. Since January 2017 EUR shows gradual upside action when new longs week by week were coming on market.
As a result, last week EUR has reached all time high level of net long position. It means that EUR is overbought a bit and chances on pullback are significant. No doubts, we have strong bullish sentiment, as open interest also has increased, but too much money on one side will make difficult further upside action.
Taking this in consideration we could say that EUR may be could reach some nearest targets, but hardly we will see 1.2175 monthly Fib level breakout prior retracement will be over:
Technicals
Monthly
As we said last time - situation on markets is changing rather fast. Not just on EUR but across the board - other currencies, commodities etc.
First week after long holiday was mixed. Range January month is rather small yet, but price was able to return back to previous 1.21 top inside flag consolidation. Although we had pretty nice EU statistics - EUR was not able to break it through. One of the explanation could be bullish position saturation, so market just can't get necessary upside momentum to break the level yet. Taking this in consideration most probable scenario is some W&R of 1.21 area by reaching daily targets and then moderate retracement. Challenging of 1.2175 Fib level will happen after retracement will be over.
All other stuff mostly stands the same. Here we have new 2018 pivots. One of the long-term setups stands in relation to YPR1 @ 1.2617 area. It seems that right now we could talk on real upside breakout of wide rectangle consolidation that has started in 2014. In October market has tried to drop below 1.15 area but failed and EUR now is forming tight flag just above rectangle. This usually means that market is building an energy. As bullish positions are overloaded right now - this standing looks absolutely normal.
In general it means that we could apply classical target for rectangle breakout - it's height. If we count it up, then we will get approximately 1.27 area, which mostly agrees with YPR1 and 50% all-time Fib resistance!
So, this is relatively long-term setup.
But right now we're mostly interested with action inside this small flag. Actually we've missed one important detail last time, which is very important. In fact, November action was upside reversal month - it's low stands under October and close price is above October high. Usually reversal candles leads for 2-3 periods of action. So, we have December and it seems that 1-2 months more should follow. That's why upside breakout of previous tops looks very probable.
Besides, reversal candle confirms real rectangle breakout by the fact of upside reversal right from its upper border and price inability to return back below 1.15 area.
Weekly
Here situation has not changed significantly.
So, on monthly we've discovered relatively long-term target - 1.2617. Now let's see what closer targets do we have. On weekly chart all targets stand in relation to last action. In fact, we should get extension of some degree.
Large AB-CD extension of monthly rectangle points on 1.2375 target. Butterfly also has 1.618 target at the same area - 1.2425.
Another extension stands around 1.2240 and this one is more interesting for us, because others stand above weekly OB area. Thus, in situation of upside breakout above recent tops - most probable target will be 1.2240
At the same time - this target suggests breaking of major monthly Fib level. Hardly it will happen at current level of COT bullish positions. Odds suggest that it could be reached after moderate retracement on daily chart...
Daily
Last week EUR has shown mixed results. Although on Tue upward action has happened but in rest 3 days EUR was under impact of different data. First it was positive statistics from EU, but later US employment has shown good numbers. As a result we see a kind of flag consolidation right below major 1.2130 target.
It means that on coming week we continue to work with our upside AB=CD pattern. Market is forming flag as above COP target as above 1.27 butterfly target. Price is not at OB and we have no real barriers above except WPR1 that was reached on Friday.
It means that upside action is just a question of time. Despite too much bulls on market - EUR has chance to pass 130 pips above. In fact, all that it needs to do is trigger stops above 1.21 and they will push price right to the target or even higher.
Next target mostly stands the same - our OP, MPR1 and butterfly 1.618 extension stand in the same area.
Intraday
Some patterns that we show you here are not the only one possible scenario. Some different action could be shown. But whatever will be formed on coming week - we should be careful to any bullish setups, as our major expectation is reaching of 1.2130 target.
Here market could form '222' Buy pattern. We plot here the scenario if price will drop still below "X" point and reach 1.618 AB-CD target. In this case minor spike of daily flag pattern could happen. But "222" Could be formed right from current level as well, because AB-CD action down has been completed.
Two different "222"'s could be finalized also by different patterns, but both of them are based on "X-A" swing. In first scenario this probably will be butterfly "Buy", as XA 1.618 extension coinsides with AB-CD XOP target.
If "222" will start around "X" point then X-A swing could become a background for smaller "222' Buy. So, whatever scenario we will get, just keep eyes open and try to catch good bullish setup here.
Conclusion:
EUR starts to show signs of changing in long-term market's sentiment. Mostly these changes shift advantage in favor of EUR as EU economy shows very good recovery pace while Fed shows not as hawkish assessment of US economy as investors suggest. Now investors suggest that Fed is not the only rate player among national Central banks of G-10 any more.
Tricky situation with strong bullish sentiment from one side and overloaded bullish positions from the other makes us think that upside potential will be limited in short-term perspective. Thus, we're just watching for reaching of 1.2130 target. After that we expect moderate retracement to come.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The dollar gained on Friday after a brief dip as investors reckoned a weaker-than-expected U.S. December non-farm payrolls report would not deter the Federal Reserve from raising interest rates multiple times this year.
U.S. nonfarm payrolls increased by 148,000 jobs last month. Economists were forecasting job gains of 190,000. Employment data for October and November data were revised to show 9,000 fewer jobs created than previously reported.
The dollar briefly slipped after the softer-than-forecast number, but has since regained momentum.
Fed funds futures have priced in a more than 60 percent chance the U.S. central bank will hike interest rates in March, according to CME’s Fedwatch.
“We do not see anything in the current report that will dissuade the consensus view that a hike is forthcoming in March,” said Marvin Loh, senior global market strategist, at BNY Mellon in Boston.
He added that while the report was disappointing given the significant headline miss, it was mostly consistent with the late stages of the U.S. economy’s current expansion.
“We have had eight years of steady employment gains, representing one of the longest expansionary periods that has pushed unemployment to near its lowest levels in 50 years,” Loh said.
Another bright spot in the U.S. December employment report was the rise in wage growth, analysts said.
Average hourly earnings rose 9 cents, or 0.3 percent, in December after gaining 0.1 percent in the prior month. That lifted the annual increase in wages to 2.5 percent from 2.4 percent in November.
In late trading, the dollar gained 0.3 percent against the yen to 113.14, while the euro fell 0.2 percent versus the dollar to $1.2042.
That put the dollar index, a measure of the greenback’s value against six major currencies, up 0.1 percent on the day.
Some analysts still expect dollar weakness to be the prevailing theme this year because other central banks such as the European Central Bank and Bank of Canada are on a tightening path as well, enhancing the allure of their currencies.
“The Fed is no longer the only game in town,” said Jane Foley, senior FX strategist at Rabobank in London. “There has been a shift in market focus away from the tightening cycle of the Fed to that of other central banks in the G10.”
Meanwhile, other data on Friday showed the U.S. services sector also cooled slightly in December. That non-manufacturing index data had little currency impact, however.
Chart of the Week: US Economic Sentiment Improves on the Back of Tax Progress
by Fathom Consulting
Our US Economic Sentiment Indicator (ESI) climbed from 6.0% to 6.2% in November, a nine-month high. Although gasoline prices rose during the month, consumer confidence remained strong as the labour market continued to improve. Meanwhile, business sentiment was buoyed by progress on tax reform. Since those surveys were conducted, tax reform has been signed into law. Since the reform includes large cuts to corporate and personal income tax, business and consumer confidence are likely to remain elevated in the coming months. Accordingly, we expect our ESI for December (scheduled for publication next week) to remain high.
Looking ahead, we expect real GDP growth to exceed 3% this year, which is not as fast as the rate of economic expansion currently implied by our ESI, but a lot higher than potential and higher than the recent past. The US will become a more attractive investment destination with its corporate tax rate now in line with that of most other OECD nations, although it remains to be seen just how much real economic activity moves to the US — some firms may exploit tax loopholes and simply book their profits there, without shifting the location of their production.
Wages and inflation will be boosted by the tax cuts, especially with the economy close to full employment, as the Phillips curve is not dead. However, the plan falls well short of the sort of stimulus that we think is required to generate a return to more normal rates of interest, and in so doing propel the US to a significantly higher growth path. Moreover, by overwhelmingly favouring the wealthiest, who have a lower-than-average marginal propensity to consume, the plan achieves less bang for its buck than it might have, and will increase income inequality, which is already being driven higher by technological change.
COT Report
If we will take a look at a bit longer picture - EUR shows impressive positive dynamic. Net position has turned positive for the first time since 2014. Since January 2017 EUR shows gradual upside action when new longs week by week were coming on market.
As a result, last week EUR has reached all time high level of net long position. It means that EUR is overbought a bit and chances on pullback are significant. No doubts, we have strong bullish sentiment, as open interest also has increased, but too much money on one side will make difficult further upside action.
Taking this in consideration we could say that EUR may be could reach some nearest targets, but hardly we will see 1.2175 monthly Fib level breakout prior retracement will be over:
Technicals
Monthly
As we said last time - situation on markets is changing rather fast. Not just on EUR but across the board - other currencies, commodities etc.
First week after long holiday was mixed. Range January month is rather small yet, but price was able to return back to previous 1.21 top inside flag consolidation. Although we had pretty nice EU statistics - EUR was not able to break it through. One of the explanation could be bullish position saturation, so market just can't get necessary upside momentum to break the level yet. Taking this in consideration most probable scenario is some W&R of 1.21 area by reaching daily targets and then moderate retracement. Challenging of 1.2175 Fib level will happen after retracement will be over.
All other stuff mostly stands the same. Here we have new 2018 pivots. One of the long-term setups stands in relation to YPR1 @ 1.2617 area. It seems that right now we could talk on real upside breakout of wide rectangle consolidation that has started in 2014. In October market has tried to drop below 1.15 area but failed and EUR now is forming tight flag just above rectangle. This usually means that market is building an energy. As bullish positions are overloaded right now - this standing looks absolutely normal.
In general it means that we could apply classical target for rectangle breakout - it's height. If we count it up, then we will get approximately 1.27 area, which mostly agrees with YPR1 and 50% all-time Fib resistance!
So, this is relatively long-term setup.
But right now we're mostly interested with action inside this small flag. Actually we've missed one important detail last time, which is very important. In fact, November action was upside reversal month - it's low stands under October and close price is above October high. Usually reversal candles leads for 2-3 periods of action. So, we have December and it seems that 1-2 months more should follow. That's why upside breakout of previous tops looks very probable.
Besides, reversal candle confirms real rectangle breakout by the fact of upside reversal right from its upper border and price inability to return back below 1.15 area.
Weekly
Here situation has not changed significantly.
So, on monthly we've discovered relatively long-term target - 1.2617. Now let's see what closer targets do we have. On weekly chart all targets stand in relation to last action. In fact, we should get extension of some degree.
Large AB-CD extension of monthly rectangle points on 1.2375 target. Butterfly also has 1.618 target at the same area - 1.2425.
Another extension stands around 1.2240 and this one is more interesting for us, because others stand above weekly OB area. Thus, in situation of upside breakout above recent tops - most probable target will be 1.2240
At the same time - this target suggests breaking of major monthly Fib level. Hardly it will happen at current level of COT bullish positions. Odds suggest that it could be reached after moderate retracement on daily chart...
Daily
Last week EUR has shown mixed results. Although on Tue upward action has happened but in rest 3 days EUR was under impact of different data. First it was positive statistics from EU, but later US employment has shown good numbers. As a result we see a kind of flag consolidation right below major 1.2130 target.
It means that on coming week we continue to work with our upside AB=CD pattern. Market is forming flag as above COP target as above 1.27 butterfly target. Price is not at OB and we have no real barriers above except WPR1 that was reached on Friday.
It means that upside action is just a question of time. Despite too much bulls on market - EUR has chance to pass 130 pips above. In fact, all that it needs to do is trigger stops above 1.21 and they will push price right to the target or even higher.
Next target mostly stands the same - our OP, MPR1 and butterfly 1.618 extension stand in the same area.
Intraday
Some patterns that we show you here are not the only one possible scenario. Some different action could be shown. But whatever will be formed on coming week - we should be careful to any bullish setups, as our major expectation is reaching of 1.2130 target.
Here market could form '222' Buy pattern. We plot here the scenario if price will drop still below "X" point and reach 1.618 AB-CD target. In this case minor spike of daily flag pattern could happen. But "222" Could be formed right from current level as well, because AB-CD action down has been completed.
Two different "222"'s could be finalized also by different patterns, but both of them are based on "X-A" swing. In first scenario this probably will be butterfly "Buy", as XA 1.618 extension coinsides with AB-CD XOP target.
If "222" will start around "X" point then X-A swing could become a background for smaller "222' Buy. So, whatever scenario we will get, just keep eyes open and try to catch good bullish setup here.
Conclusion:
EUR starts to show signs of changing in long-term market's sentiment. Mostly these changes shift advantage in favor of EUR as EU economy shows very good recovery pace while Fed shows not as hawkish assessment of US economy as investors suggest. Now investors suggest that Fed is not the only rate player among national Central banks of G-10 any more.
Tricky situation with strong bullish sentiment from one side and overloaded bullish positions from the other makes us think that upside potential will be limited in short-term perspective. Thus, we're just watching for reaching of 1.2130 target. After that we expect moderate retracement to come.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.